Every. business owner is faced with a periodic compliance obligation and submitting their Company Accounts to HMRC, and the Companies House.

The documents required to comply with the obligations can be classified as a result of a process called “Financial Accounting”.

Looking at the financial performance of any business from the perspective of a manager, the term “Management Accounting” is introduced.

For the sake of brevity, we will not go deep into managerial function, but I always quote the late Peter Ashton, a local Chairman of the Federation of Small Businesses in the Bideford branch, who told me at the time:

"It is rather challenging to plan for the next year or even a quarter taking into account the missing stability."

Having said that, we clearly see that in an unstable environment, we just cannot afford to fly blind, and we need to touch on the pulse of the business by looking at its past performance, and current trend.

What are then the main differences between the financial and management accounting?

The Management Accounts cover the needs of managers, and their users are internal. For financial accounting - they are governed by Company Law and used by external parties.

The time period can be different, as for Management Accounts we need to generate them monthly, or quarterly, when looking back on the past performance. More seasonal businesses may require different reporting periods to compare between seasons.

Also, the structure of the business must be reflected in the management accounts, e.g. divisional or departmental structure, if these units need to report separately. That requirement doesn’t exit for financial accounting, as the company usually doesn’t need to report on its internal organisational units.

The following qualities need to be emphasised—speed vs. accuracy.

As our users say, Management Accounts are as good as they are valid—now! Not tomorrow, not yesterday.

So we need to be able to compile them quickly. Compared to financial accounting where the accuracy is the key.

All of us went through a lot of pain when we cannot something reconcile, or a transaction needs to be entered into a suspense account, because we simply are missing information from another system.

All of that can happen, but that is where the speed of generating Management Accounts is important, and the accuracy comes later - obviously acknowledging the issues.

Summarising my thoughts, here is a nutshell version about financial vs. management accounting.

  1. Governed by Company Law vs. Needs of managers.

  2. Fulfilling the needs of External Users vs. the Needs of Internal Staff.

  3. The time period for management accounting is flexible and reflects the needs of the business.

  4. The internal organisation structure must be reflected in the Management Accounts.

  5. Trade speeds against accuracy, as the Management Accounts are only valid when they have been compiled.